The latest bold bet from ‘The 400% Man’

Commentary: Why a top stock picker believes in Bank of America

Who was gutsy enough to load up on Bank of America
BAC, -0.84%
stock when it collapsed in late 2011?

Allan Mecham, that’s who.

Reuters

The so-called 400% Man, a nickname that refers to his astounding returns since the turn of the century, is the manager of the private wealth fund Arlington Value in Salt Lake City, Utah.

In his most recent annual report to Arlington’s investors, Mecham reveals he made big profits for investors last year on a bold move into the bank everybody loves to hate: Bank of America stock, which slumped as low as $5, has since rocketed to $12.

Mecham tells investors that his interest in the stock was piqued by the actions of chief executive Brian Moynihan, who behind the headlines is busy undoing a lot of the damage caused by the previous management’s undisciplined over-expansion.

“Just as prior management embarked on an unwieldy strategy of growing bigger,” Mecham writes, Moynihan “set the opposite course—diligently selling assets, cutting costs, reducing leverage, simplifying the business, and getting back to old-school banking values. In essence, [Bank of America] has grown stronger by shrinking.” Moynihan’s lesson from 2008: All things in moderation.

Mecham still likes Bank of America stock, even at current levels. He says the company’s underlying strengths are being masked by leftover problems from the past, but that these are temporary and should clear in due course. When that happens, he believes the bank should earn $2 to $3 a share. That would represent a juicy earnings yield of 17% to 25% on the current stock price.

Mecham’s fund held $34 million, or 18% of its assets, in Bank of America at the end of 2012.

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The Bank of America stake was just one contributor to yet another successful year for Arlington. The fund earned a stellar 36%—or 29% net of fees—in 2012, way ahead of the 16% gain for Standard & Poor’s 500-stock index.

The fund has trounced market indexes since it was launched in 1999. In part that’s due to Mecham’s policy of tuning out all the noise on Wall Street and concentrating on company fundamentals. (I delved more deeply into Mecham’s methodology last year in this profile for SmartMoney magazine.)

“The steady drumbeat of macro fears has caused many managers to question the virtues of old fashioned stock picking, suggesting that a plain vanilla bottoms-up approach is incomplete and dangerous,” Mecham wrote to his investors this year. “We hold the opposite view and question the wisdom of letting macro forecasts drive investment behavior. Our approach is akin to that of an NBA basketball player shooting clutch free-throws: We try to tune out the noxious crowd.”

Mecham’s partner, Ben Raybould, told me last year that Mecham wants to get rid of the computers in their office, as they are a distraction. Mecham spends his time reading—mainly company filings, which he prints out, old-school.

You couldn’t get further from the modern world of Wall Street, where everyone is supposed to be online and connected all the time, and where we are all drowning in data. Every time someone praises the Internet in my presence I am reminded of Darth Vader’s scathing comment about the Death Star: “Don’t be too proud of this technological terror you’ve constructed.”

The fact that Mecham beats the Internet boys into a cocked hat, year after year, makes me want to cheer. It is proof that reason, contemplation and common sense can beat the fast, arrogant, obnoxious hustle of Wall Street. I mean this as no disrespect to Mecham, who is an exceptionally intelligent young man, but the most amazing part about Arlington is not his extraordinary virtues, but his ordinary ones.

The Bank of America stake was only one part of a successful year. Arlington also made a good turn in brokerage firm Jefferies & Co., buying stock cheaply when the company got caught up in the MF Global bankruptcy. It has since sold its position.

Arlington continues to hold an extraordinary stake in Warren Buffett’s conglomerate Berkshire Hathaway
BRK.A, -1.00%
, which accounted for 60% of the fund at year’s end. “Not only is [Berkshire] unusual in strength and safety, it’s also cheap—a nirvana-like combination,” Mecham writes. (Berkshire’s stock rose around 25% in 2012—beating the broader market, but trailing Arlington.)

Few money managers would dare hold 60% of their fund in a single company, arguing that this would be too “risky.” Yet Mecham points out that Berkshire is a conglomerate which includes stakes in a large number of independent businesses, from Coca-Cola
KO, +0.10%
to Procter & Gamble
PG, -0.94%
to American Express
AXP, +0.42%
. If he had allocated the same money pro rata to all these different businesses, no one would even blink.

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